Do Small Businesses Create Jobs?

August 24, 1998

Small business isn't the engine of job creation it is often portrayed as, contends a new study from the liberal Economic Policy Institute. Moreover, small businesses pay substantially lower wages than big ones, and offer workers fewer benefits.

"Small Consolation: The Dubious Benefits of Small Business for Job Growth and Wages," by economist Dale Belman of the University of Wisconsin Milwaukee and others, questions the benefits of public policies favoring small businesses, such as the exemption from the Family and Medical Leave Act. Belman says such exemptions shift the cost of doing business to large companies.

Based on the U.S. Census Bureau's 1993 Current Population Survey, the study found:

Employees at large companies, or those with 1,000 employees or more, earn an average of $13.05 an hour -- 39 percent more than the $9.39 average paid by firms with fewer than 25 employees.

They also receive better benefits, with 78 percent covered by employers' health insurance, compared with 30 percent at small businesses, and nearly 69 percent are covered by pensions, compared with only 13 percent at small companies.

And they have longer tenure, staying an average of 8.5 years, compared with 4.4 years for those at the smallest firms.

Critics of the study say the results are skewed because wages and benefits for the largest and smallest businesses are compared, exaggerating their differences, while firms within industries aren't compared. Also, a Small Business Administration study found that nearly 77 percent of the 6.9 million jobs created from 1990 to 1995 were created by small businesses. And although about 50 percent of start-up businesses fail within five years, the survivors -- like Microsoft, Netscape and Dell Computer -- create many new jobs.